-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rz+LvGWvDPePJQPx7y9hLicAHpIxhl4QiMdF2uHvdHKIvYAAN9FBsd3kPHLh+R7I 90qco8Klr1NRTjHipi68+Q== 0000927016-00-001914.txt : 20000517 0000927016-00-001914.hdr.sgml : 20000517 ACCESSION NUMBER: 0000927016-00-001914 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000401 FILED AS OF DATE: 20000516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECIALTY CATALOG CORP CENTRAL INDEX KEY: 0001020897 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 043253301 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21499 FILM NUMBER: 637369 BUSINESS ADDRESS: STREET 1: 21 BRISTOL DRIVE CITY: SOUTH EASTON STATE: MA ZIP: 02375 BUSINESS PHONE: 5082380199 MAIL ADDRESS: STREET 1: 21 BRISTOL DRIVE CITY: SOUTH EASTON STATE: MA ZIP: 02375 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended April 1, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21499 ------------------------- SPECIALTY CATALOG CORP. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 04-3253301 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 21 BRISTOL DRIVE SOUTH EASTON, MASSACHUSETTS 02375 (Address of principal executive offices) (Zip Code (508) 238-0199 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Number of shares of the Registrant's Common Stock outstanding as of May 1, 2000: 4,337,886. ================================================================================ SPECIALTY CATALOG CORP. INDEX PART I. FINANCIAL STATEMENTS
Page No. -------- Item 1. Condensed Consolidated Financial Statements as of April 1, 2000 and January 1, 2000, and for the Three Months Ended April 1, 2000 and April 3, 1999 Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11 Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
-2- PART I. FINANCIAL STATEMENTS Item 1. Condensed Consolidated Financial Statements SPECIALTY CATALOG CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended April 1, 2000 April 3, 1999 ------------- ------------- Net sales............................................... $ 13,963,300 $ 13,266,668 Cost of sales (including buying, occupancy and order fulfillment costs).................................. 4,867,849 4,560,428 ------------- ------------- Gross profit............................................ 9,095,451 8,706,240 Operating expenses...................................... 8,548,359 7,468,154 Depreciation and amortization........................... 399,701 197,936 ------------- ------------- Income from operations.................................. 147,391 1,040,150 Interest expense, net................................... 214,580 195,813 ------------- ------------- Income (loss) before income taxes....................... (67,189) 844,337 Income tax provision (benefit).......................... (27,560) 347,169 ------------- ------------- Net income (loss)....................................... (39,629) 497,168 ------------- ------------- Other comprehensive income (loss)....................... 4,667 (36,286) ------------- ------------- Comprehensive income (loss)............................. $ (34,962) $ 460,882 ============= ============= Earnings per share - Basic EPS: Net income (loss) per share....................... $ (0.01) $ 0.11 ============= ============= Weighted average shares outstanding............... 4,351,386 4,440,264 ============= ============= Earnings per share - Diluted EPS: Net income (loss) per share....................... $ (0.01) $ 0.11 ============= ============= Weighted average shares outstanding............... 4,351,386 4,723,636 ============= =============
See notes to condensed consolidated financial statements. -3- SPECIALTY CATALOG CORP. CONDENSED CONSOLIDATED BALANCE SHEETS
April 1, January 1, April 3, 2000 2000 1999 ---- ---- ---- (unaudited) (audited) (unaudited) Assets Current assets: Cash and cash equivalents...................................... $ 202,181 $ 1,136,847 $ 911,969 Accounts receivable, net....................................... 1,545,581 1,206,490 1,204,924 Inventories.................................................... 5,178,285 5,626,304 5,156,821 Prepaid expenses............................................... 4,815,705 4,012,538 3,620,620 ------------ ------------ ------------ Total current assets.................................. 11,741,752 11,982,179 10,894,334 ------------ ------------ ------------ Property, plant and equipment, net................................... 4,458,544 4,326,710 3,249,525 Intangible assets, net............................................... 4,413,270 4,563,627 3,469,341 Deferred income taxes................................................ 4,463,318 4,338,843 4,378,682 Other assets......................................................... 188,190 211,918 211,856 ------------ ------------ ------------ Total assets......................................... $ 25,265,074 $ 25,423,277 $ 22,203,738 ============ ============ ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses.......................... $ 5,790,498 $ 4,261,400 $ 3,486,672 Liabilities to customers....................................... 1,667,366 1,169,256 965,498 Short-term borrowings.......................................... 4,744,824 6,401,238 4,039,272 Income taxes payable........................................... 500,944 449,577 325,562 Current portion of long-term debt.............................. 2,369,706 2,125,000 1,958,863 ------------ ------------ ------------ Total current liabilities............................ 15,073,338 14,406,471 10,775,867 ------------ ------------ ------------ Long-term debt....................................................... 2,140,824 2,900,000 3,516,940 Other long-term liabilities.......................................... 346,943 377,875 234,667 Commitments and contingencies Shareholders' equity: Common stock................................................... 52,397 52,397 52,397 Additional paid-in capital..................................... 16,159,570 16,159,570 16,159,570 Deferred compensation.......................................... - - (43,988) Accumulated other comprehensive loss........................... (46,583) (51,250) (20,360) Accumulated deficit............................................ (5,629,683) (5,590,054) (5,892,372) ------------ ------------ ------------ 10,535,701 10,570,663 10,255,247 Less treasury stock, at cost, 888,388 shares at April 1, 2000 and January 1, 2000, and 822,188 shares at April 3, 1999..... (2,831,732) (2,831,732) (2,578,983) ------------ ------------ ------------ Total shareholders' equity ............................ 7,703,969 7,738,931 7,676,264 ------------ ------------ ------------ Total liabilities and shareholders' equity ...... $ 25,265,074 $ 25,423,277 $ 22,203,738 ============ ============ ============
See notes to condensed consolidated financial statements. -4- SPECIALTY CATALOG CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended April 1, 2000 April 3, 1999 ------------- ------------- Cash flows from operating activities: Net income (loss).................................................... $ (39,629) $ 497,168 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................................... 399,701 197,936 Deferred income taxes............................................ (121,358) 348,659 Amortization of deferred compensation............................ -- 4,375 Changes in operating assets and liabilities: Accounts receivable, net....................................... (343,966) 3,032 Inventories.................................................... 435,630 214,318 Prepaid expenses............................................... (804,610) 184,486 Other assets................................................... 22,701 (34,861) Accounts payable and accrued expenses.......................... 1,540,923 (273,359) Liabilities to customers....................................... 498,110 289,051 Income taxes payable........................................... 55,213 58,509 Other long-term liabilities.................................... (4,167) -- ------------- ------------- Net cash provided by operating activities............................ 1,638,548 1,489,314 ------------- ------------- Cash flows from investing activities: Purchases of property, plant and equipment...................... (432,684) (339,465) ------------- ------------- Net cash used in investing activities................................ (432,684) (339,465) ------------- ------------- Cash flows from financing activities: Repayments on short-term borrowings, net........................ (1,632,871) (990,285) Purchases of treasury stock..................................... -- (225,342) Repayments of long-term debt.................................... (500,000) (102,154) Repayments of capital lease obligations......................... (26,765) (17,209) ------------- ------------- Net cash used in financing activities................................ (2,159,636) (1,334,990) ------------- ------------- Effect of exchange rate changes on cash and cash equivalents......... 19,106 (761) ------------- ------------- Decrease in cash and cash equivalents................................ (934,666) (185,902) Cash and cash equivalents, beginning of year......................... 1,136,847 1,097,871 ------------- ------------- Cash and cash equivalents, end of year............................... $ 202,181 $ 911,969 ============= =============
Supplemental disclosures of cash flow information: During the three months ended April 1, 2000 and April 3, 1999, the Company received federal income tax refunds of $320,000 and $375,000, respectively. Summary of non-cash transactions: During the three months ended April 3, 1999, the Company recorded capital lease obligations of $100,257 related to the purchase of data processing equipment. See notes to condensed consolidated financial statements. -5- SPECIALTY CATALOG CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation These unaudited condensed consolidated financial statements should be read in conjunction with the Form 10-K of Specialty Catalog Corp. (the "Company") for the fiscal year ended January 1, 2000, and the consolidated financial statements and footnotes included therein. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The results of operations for the three months ended April 1, 2000 are not necessarily indicative of the results for the entire fiscal year ending December 30, 2000. The condensed consolidated financial statements for the three months ended April 1, 2000 and April 3, 1999 are unaudited but include, in the Company's opinion, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results for the periods presented. 2. Accounting Policies The accounting policies underlying the condensed consolidated financial statements are those set forth in Note 1 of the consolidated financial statements included in the Company's Form 10-K for the year ended January 1, 2000. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet determined the effect, if any, of adopting SFAS No. 133 on the condensed consolidated financial statements. Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. 3. Reconciliation of Basic and Diluted Earnings per Share The following table (in thousands) shows the amounts used in computing basic and diluted earnings per share for net income (loss) and the effects of potentially dilutive options on the weighted average number of shares outstanding.
For the three months ended April 1, 2000 April 3, 1999 ------------- ------------- Net Loss Shares Net Income Shares -------- ------ ---------- ------ Basic earnings per share $ (40) 4,351 $ 497 4,440 Effect of dilutive options -- -- -- 284 ------ ----- ----- ----- Diluted earnings per share $ (40) 4,351 $ 497 4,724 ====== ===== ===== =====
Options to purchase 953,477 shares of common stock ranging from $0.31 to $7.15 per share were not included in computing diluted EPS for the three months ended April 1, 2000 because their effects were antidilutive. Options to purchase 585,435 shares of common stock ranging from $5.33 to $7.15 per share were not included in computing diluted EPS for the three months ended April 3, 1999 because their effects were antidilutive. -6- SPECIALTY CATALOG CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) 4. Operating Expenses Charges Related to Golub Transaction On December 3, 1999, the Company and Golub Associates, Inc. ("GAI") jointly announced the execution of a non-binding letter of intent pursuant to which GAI would lead a transaction to acquire all of the outstanding common stock of Specialty Catalog Corp. for a cash purchase price of $5.00 per share. This transaction was subject to various contingencies. On January 19, 2000, a merger agreement was entered into which provided for a cash merger in which the holders of common stock of the Company immediately prior to the effective date of the merger would have received $5.00 per share of the Company's common stock. The merger agreement was subject to the satisfaction of a number of closing conditions. On March 9, 2000, the Company announced that the Company and GAI and its affiliates had mutually terminated the merger agreement because, even though financing had been arranged, certain other closing conditions could not be satisfied in a timely manner. The Company recorded charges of approximately $352,000 to operating expenses during the three months ended April 1, 2000. Resignation of Chief Executive Officer In August 1999, the Company announced the resignation of its chief executive officer. In connection with the resignation and its search for a new chief executive officer, in the third quarter of 1999, the Company recorded a pretax charge of $500,000, consisting of severance and other severance related benefits and recruiting fees incurred. Coincident with the execution of the GAI merger agreement (see footnote 5), the Company and Mr. Bock entered into an amendment to his employment agreement wherein Mr. Bock agreed to remain with the Company until the earlier of June 30, 2000, or the closing of the GAI merger agreement. Under the terms of the employment agreement, as amended, Mr. Bock was paid a severance payment of $325,000 on January 3, 2000. There was no accrued compensation expense at April 1, 2000 in connection with these charges. Also, under the terms of the agreement and the amendment to the employment agreement, Mr. Bock is entitled to receive his normal compensation until June 30, 2000, and a bonus of $175,000, $75,000 of which was paid on January 3, 2000, $50,000 of which was paid on or about March 14, 2000, and $50,000 of which was paid on or about April 5, 2000. One-half of these bonus payments, or $87,500, was charged to operating expenses during the three months ended April 1, 2000, and the remaining $87,500 will be charged to operating expenses during the second quarter of 2000. Closure of Paula's Hatbox Catalog During the fourth quarter of 1999, in a move motivated by the desire to exit the competitive ladies ready-to-wear market segment, and to dedicate its focus and resources on the growth and development of the Company's core wig businesses, the Company decided to stop circulating the Paula's Hatbox(R) catalog. The Company recorded a pretax charge of $730,000 in October 1999 related to severance and severance related benefits, the write-off of remaining unamortized deferred catalog costs and inventory write-offs. There was no accrued restructuring charge remaining at April 1, 2000 in connection with this closure. Special Charges in 1998 In August 1998, the Company announced a reorganization of certain management positions. In connection with this reorganization, the Company recorded in the third quarter of 1998 a pretax charge of $469,558, consisting of severance pay and other severance related benefits for five former employees of the Company. The Company -7- SPECIALTY CATALOG CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) paid out the severance and severance related benefits through July 1999. Included in accrued expenses at April 3, 1999 were accrued restructuring charges of $53,917. 5. Long-Term Debt On May 12, 2000, the Company and Fleet National Bank (the "Bank") amended the Credit and Guaranty Agreement (the "Amended BKB Agreement"). The amended agreement modifies the definition of Consolidated EBITDA to exclude the special charges associated with the terminated transaction with Golub Associates Inc. In addition, certain debt covenants were amended. The Amended BKB Agreement matures in October 2001 and has repayments of $1,750,000 in 2000 and $2,250,000 in 2001. 6. Subsequent Events Rights Agreement On April 11, 2000, the board of directors of the Company adopted a stockholder rights plan pursuant to a Rights Agreement dated as of April 11, 2000, between the Company and Continental Stock Transfer and Trust Company, as Rights Agent. The Rights Agreement is effective as of April 11, 2000 for all shares of Common Stock outstanding on such date and for all shares of Common Stock issued thereafter and prior to the earliest of the Distribution Date (as defined in the Rights Agreement). Each Right shall be exercisable (as defined in the Rights Agreement) by the registered holder of a Right Certificate to purchase 1/1000/th/ of a share of Series A Preferred Stock, subject to adjustment, at an exercise price per 1/1000/th/ of a share of Series A Preferred Stock of $15, subject to adjustment. Each 1/1000/th/ of a share of Series A Preferred Stock will have economic attributes (i.e., participation in dividends and voting rights) substantially equivalent to one whole share of the Common Stock of the Company. The Rights will expire on the tenth anniversary of the date of the Rights Agreement unless earlier redeemed or exchanged by the Company as provided in the Rights Agreement. For further information, a detailed description of the Rights Agreement included in a current report on Form 8-K was filed with the Securities and Exchange Commission on April 11, 2000. Executive Officer Appointment On May 9, 2000, the Company announced the appointment of Joseph J. Grabowski (age 53) as president of the Company effective immediately. On July 1, 2000, Mr. Grabowski will assume the title of CEO, replacing Steven L. Bock whose resignation, effective June 30, 2000, was previously announced. The term of the executive employment agreement between the Company and Mr. Grabowski commenced on May 8, 2000 and terminates on May 7, 2002 (the "Initial Term"). Under this employment agreement, Mr. Grabowski will receive an annual salary of $300,000. Mr. Grabowski will be eligible for a performance bonus ranging between 0% to 100% of his annual salary, based upon the Company's performance as compared against the annual plan approved by the Board. Upon the termination of the Initial Term, this agreement shall automatically renew for successive one year periods unless either party gives the other written notice of its election not to renew at least 90 days before the expiration of the Initial Term or any renewal period. Upon executing this agreement, Mr. Grabowski was granted options under the 2000 Stock Incentive Plan, subject to shareholder approval, to purchase 250,000 shares of common stock of the Company, at the fair market value price on the commencement date of his employment agreement. The Company shall obtain and maintain at all times during the Initial Term a term life insurance policy on Mr. Grabowski of $500,000, of which a designee of Mr. Grabowski is the beneficiary. -8- SPECIALTY CATALOG CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) The Company may terminate Mr. Grabowski's employment: (i) upon his death or permanent disability and (ii) if he engages in conduct that constitutes "cause". Mr. Grabowski may terminate his agreement for "Good Reason" as defined in the employment agreement. In the event Mr. Grabowski's employment is terminated for any reason other than "cause", Mr. Grabowski will receive a "Termination Payment" as defined in the employment agreement. Mr. Grabowski's employment agreement contains non-competition and other restrictions effective during the term of employment and for a one-year period thereafter. 7. Business Segments and Financial Information by Geographic Location Specialty Catalog Corp. has four reportable segments: SC Direct, Daxbourne International Limited, SC Publishing and American Healthcare Institute. The SC Direct segment sells women's wigs and hairpieces using two distinct catalogs: Paula Young(R) and Especially Yours(R). In addition, prior to the end of 1999, SC Direct sold apparel, hats and other fashion accessories through its Paula's Hatbox(R) catalog. Daxbourne International Limited is a retailer and wholesaler of women's wigs, hairpieces and related products in the United Kingdom. SC Publishing distributes catalogs under its Western Schools(R) brand and specializes in providing continuing education courses to nurses and accounting professionals. American Healthcare Institute, which was acquired by the Company on September 10, 1999, distributes catalogs under its own name and specializes in providing continuing education seminars and conferences to nurses and other mental health professionals. The accounting policies of the reportable segments are the same as those described in Note 1 of the consolidated financial statements included in the Company's Form 10-K for the year ended January 1, 2000. The Company's reportable segments are strategic business units that offer either different products or operate in different geographic locations. The Company markets its products in two major geographic areas, the United States and the United Kingdom. SC Direct, SC Publishing and American Healthcare Institute market their products and maintain their assets in the United States. Daxbourne International Limited markets its products and maintains its assets in the United Kingdom. -9- SPECIALTY CATALOG CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) A summary of information about the Company's operations by segment for the three months ended April 1, 2000 and April 3, 1999 follows (intersegment eliminations are intercompany receivables and investments in subsidiaries):
American SC SC Healthcare Intersegment Direct Daxbourne Publishing Institute Eliminations Total ------ --------- ---------- --------- ------------ ----- For the three months ended April 1, 2000 Net sales.................. $10,004,688 $1,444,037 $1,701,282 $ 813,293 $ -- $ 13,963,300 Gross profit............... 6,286,607 1,002,369 1,356,342 450,133 -- 9,095,451 Operating expenses......... 6,686,156 649,160 722,910 490,133 -- 8,548,359 Depreciation and amortization............. 261,750 93,434 10,672 33,845 -- 399,701 Income (loss) from operations............... (661,299) 259,775 622,760 (73,845) -- 147,391 Interest expense, net...... 155,204 59,376 -- -- -- 214,580 Income tax provision (benefit)................ (329,460) 76,696 255,332 (30,128) -- (27,560) Segment assets............. 20,116,284 4,998,529 4,745,380 2,413,791 $(7,008,910) 25,265,074 Capital expenditures....... 380,050 15,359 -- 37,275 -- 432,684 American SC SC Healthcare Intersegment Direct Daxbourne Publishing Institute Eliminations Total ------ --------- ---------- --------- ------------ ----- For the three months ended April 3, 1999 Net sales.................. $10,300,330 $1,389,169 $1,577,169 $ -- $ -- $ 13,266,668 Gross profit............... 6,518,594 985,225 1,202,421 -- -- 8,706,240 Operating expenses......... 6,186,097 661,793 620,264 -- -- 7,468,154 Depreciation and amortization............. 91,525 95,484 10,927 -- -- 197,936 Income from operations..... 240,972 227,948 571,230 -- -- 1,040,150 Interest expense, net...... 129,852 65,961 -- -- -- 195,813 Income tax provision....... 45,560 67,392 234,217 -- -- 347,169 Segment assets............. 17,353,209 5,094,904 4,005,714 -- $ (4,250,089) 22,203,738 Capital expenditures....... 334,012 -- 5,453 -- -- 339,465
-10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations In addition to the historical information contained herein, this Quarterly Report on Form 10-Q for the Company may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), including, but not limited to, the Company's expected future revenues, operations and expenditures, estimates of the potential markets for the Company's products, assessments of competitors and potential competitors and projected timetables for the market introduction of the Company's products. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, but not limited to, the following risks and uncertainties: (i) the Company's indebtedness and future capital requirements, (ii) increasing postal rates, paper prices and media costs, (iii) limited sources of fiber used to make the Company's products, (iv) the limited number of suppliers of the Company's products, (v) the Company's dependence upon foreign suppliers, especially in China, Indonesia and Korea, (vi) the customary risks of doing business abroad, including fluctuations in the value of currencies, (vii) the potential development of a cure for hair loss and cancer treatment improvements, (viii) the effectiveness of the Company's catalogs and advertising programs, (ix) the Company's competition and (x) the impact of acquisitions on the Company's prospects. Additional information concerning certain risks and uncertainties that could cause actual results to differ materially from those projected or suggested in the forward-looking statements is contained in the Company's filings with the Securities and Exchange Commission, including those risks and uncertainties discussed under the caption "Risk Factors" in the Company's Form 10-K for the year ended January 1, 2000. The forward-looking statements contained herein represent the Company's judgment as of the date of this Quarterly Report on Form 10-Q, and the Company cautions readers not to place undue reliance on such statements. Three Months Ended April 1, 2000 Compared to the Three Months Ended April 3, 1999 Net sales increased to $14.0 million for the three months ended April 1, 2000 from $13.3 million for the three months ended April 3, 1999, an increase of approximately $697,000, or 5.2 per cent. This increase was due to: (i) the addition of approximately $813,000 in net sales from American Healthcare Institute ("AHI"), which was acquired by the Company in September 1999 and (ii) increases in SC Publishing's and Daxbourne's net sales of approximately $124,000 and $55,000, respectively, primarily due to improved customer response rates as a result of changes in circulation strategies. These net sales increases for the three months ended April 1, 2000 were offset by lower SC Direct net sales of approximately $295,000. The decrease in SC Direct's net sales was primarily due to a decrease of approximately $914,000 in net sales from its Paula Hatbox(R) catalog, as a result of the Company's decision in the fourth quarter of 1999 to no longer circulate this catalog, offset by increases in SC Direct's Paula Young(R) and Especially Yours(R) catalogs of approximately $572,000 and $46,000, respectively, due primarily to increased orders from increased circulation of its catalogs to new and expanded advertising channels and sales over the Internet as well as an increase in average order sizes, attributable to changes in the product mix in both catalogs. Gross margin as a percentage of net sales decreased to 65.1 per cent for the three months ended April 1, 2000 from 65.6 per cent for the three months ended April 3, 1999. Gross margin increased to $9.1 million for the three months ended April 1, 2000 from $8.7 million for the three months ended April 3, 1999, an increase of approximately $389,000, or 4.5 per cent, as a result of the increase in net sales discussed above, offset by the reduction in the gross margin rate mentioned above. Operating expenses increased to $8.9 million for the three months ended April 1, 2000 from $7.7 million for the three months ended April 3, 1999, an increase of $1.2 million, or 15.6 per cent. This increase was primarily due to (i) the addition of approximately $524,000 of operating expenses from AHI, (ii) approximately $439,000 related to costs incurred in connection with the bonus paid to the chief executive officer and the terminated sale of the Company's common stock to Golub Associates, Inc., (iii) additional catalog production expenses of approximately $301,000, as a result of an increase in the number of catalogs mailed due to renewed circulation to inactive customer files in an effort to reactivate these names and (iv) increased depreciation and amortization of -11- approximately $202,000 related to the implementation of the Company's catalog information system in August 1999. Excluding the pretax special charges associated with the terminated transaction with Golub Associates Inc. mentioned above, net income for the three months ended April 1, 2000 would have been approximately $220,000, or $0.05 per diluted share. On this basis, EBITDA (net income before interest, income taxes, depreciation and amortization) for the three months ended April 1, 2000 was approximately $987,000. On an actual basis, EBITDA was approximately $547,000 for the three months ended April 1, 2000. Interest expense, net of interest income, increased to approximately $215,000 for the three months ended April 1, 2000 from approximately $196,000 for the three months ended April 3, 1999, an increase of approximately $18,000, or 9.2 per cent. The increase was attributable to higher average principal amounts outstanding on the Company's bank facility as well as increased interest rates during the first quarter of 2000 compared to the first quarter of 1999. Liquidity and Capital Resources Net cash flow used by the Company for the three months ended April 1, 2000 was approximately $935,000, of which $2.2 million and approximately $433,000 was used in financing activities and investing activities, respectively, offset by $1.6 million provided by operating activities. The major factors that caused the difference between net loss and net cash flows provided by operations for the three months ended April 1, 2000 were: increases in: (i) cash working capital items of $1.4 million, and (ii) depreciation and amortization expense of approximately $400,000, offset by a decrease in deferred income taxes of approximately $121,000. The $2.2 million in net cash used in financing activities was primarily due to: (i) the repayment of $1.6 million in short-term borrowings, (ii) the repayment of $500,000 of long-term debt, and (iii) the repayment of approximately $27,000 related to capital leases. The Company used approximately $433,000 in investing activities for computer and equipment purchases. On April 11, 2000, the board of directors of the Company adopted a stockholder rights plan pursuant to a Rights Agreement dated as of April 11, 2000, between the Company and Continental Stock Transfer and Trust Company, as Rights Agent. The Rights Agreement is effective as of April 11, 2000 for all shares of Common Stock outstanding on such date and for all shares of Common Stock issued thereafter and prior to the earliest of the Distribution Date (as defined in the Rights Agreement). Each Right shall be exercisable (as defined in the Rights Agreement) by the registered holder of a Right Certificate to purchase 1/1000/th/ of a share of Series A Preferred Stock, subject to adjustment, at an exercise price per 1/1000/th/ of a share of Series A Preferred Stock of $15, subject to adjustment. Each 1/1000/th/ of a share of Series A Preferred Stock will have economic attributes (i.e., participation in dividends and voting rights) substantially equivalent to one whole share of the Common Stock of the Company. The Rights will expire on the tenth anniversary of the date of the Rights Agreement unless earlier redeemed or exchanged by the Company as provided in the Rights Agreement. For further information, a detailed description of the Rights Agreement included in a current report on Form 8-K was filed with the Securities and Exchange Commission on April 11, 2000. On May 12, 2000, the Company and Fleet National Bank (the "Bank") amended the Amended BKB Agreement. The amended agreement modifies the definition of Consolidated EBITDA to exclude the special charges associated with the terminated transaction with Golub Associates Inc. In addition, certain debt covenants were amended. The Amended BKB Agreement matures in October 2001 and has repayments of $1,750,000 in 2000 and $2,250,000 in 2001. The Company's cash flow from operations and available credit facilities are considered adequate to fund planned business operations and both the short-term and long-term capital needs of the Company. However, certain events, such as an additional significant acquisition, could require new external financing. -12- Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not yet determined the effect, if any, of adopting SFAS No. 133 on the consolidated financial statements. Quantitative and Qualitative Disclosures About Market Risk The Company's primary exposures to market risks include fluctuations in interest rates on its short-term and long-term borrowings of $9.3 million as of April 1, 2000 under its credit facility and in foreign currency exchange rates. The Company does not use derivative financial instruments. Historically, the Company has not experienced material gains or losses due to interest rate changes. Management does not believe that the risk inherent in the variable-rate nature of these instruments will have a material adverse effect on the Company's consolidated financial statements. However, no assurance can be given that such a risk will not have a material adverse effect on the Company's consolidated financial statements in the future. The Company's Term Loan and Line of Credit bear interest rates based on either a base rate or a LIBOR contract rate. The Company's UK Term Loan and the UK Line of Credit bear interest rates based on either a Sterling base rate or a LIBOR contract rate. As of April 1, 2000, the outstanding balance on all of the Company's credit facilities was $9,255,354. Based on this balance, an immediate change of one per cent in the interest rate would cause a change in interest expense of approximately $93,000 on an annual basis. The Company's objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared with fixed-rate borrowings. The foreign currencies to which the Company has the most significant exchange rate exposure are the British Pound, Chinese Yuan, Indonesian Rupiah and Korean Won. The Company expects that most of its wigs and hairpieces will continue to be manufactured in China, Indonesia and Korea in the future. Although a substantial portion of the Company's transactions with these countries occurs in US dollars, the Company's operations may be subject to fluctuations in the value of these countries' currencies. Although to date such exchange rate exposures have not had a significant effect on the Company's business operations, no assurance can be given that such exchange rate exposures will not have a material adverse effect on the Company's business operations in the future. -13- PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement dated as of May 8, 2000 between the Registrant and Joseph Grabowski, filed herewith. 10.2 Eighth Amendment to Credit and Guaranty Agreement and Seventh Amendment to Credit Agreement dated as of May 12, 2000 between the Fleet National Bank and the Registrant, filed herewith. 10.3 Rights Agreement between Specialty Catalog Corp. and Continental Stock Transfer and Trust Company, as Rights Agent. Filed as Exhibit 4.1 to Specialty Catalog Corp's Form 8-K, dated April 11, 2000, File No. 0-21499. 27.1 Financial Data Schedule (for EDGAR filing purposes only), filed herewith. (b) Reports on Form 8-K Three reports on Form 8-K were filed during the three months ended April 1, 2000: . January 18, 2000 - Agreement and Plan of Recapitalization and Merger by and among Golub Associates Incorporated, Catalog Acquisition Corp. and Specialty Catalog Corp.; and Company Option Agreement by and among Golub Associates Incorporated and Specialty Catalog Corp. . February 11, 2000 - Agreement extending the time available to Golub Associates Incorporated to secure its financing commitments until March 1, 2000. . March 14, 2000 - Termination of Agreement and Plan of Recapitalization and Merger by and among Golub Associates Incorporated, Catalog Acquisition Corp. and Specialty Catalog Corp Reports on Form 8-K filed subsequent to the three months ended April 1, 2000: . April 11, 2000 - Rights Agreement between Specialty Catalog Corp. and Continental Stock Transfer and Trust Company, as Rights Agent. -14- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SPECIALTY CATALOG CORP. Dated: May 15, 2000 By: /s/ Joseph Grabowski -------------------------------- President Dated: May 15, 2000 By: /s/ Thomas McCain -------------------------------- Thomas McCain Senior Vice President and Chief Financial Officer -15- EX-10.1 2 EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of May 8, 2000 is entered into between Specialty Catalog Corp., a Delaware corporation (the "Employer" or the "Company") and Joseph Grabowski (the "Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Company desires to employ the Executive and to be assured of his services on the terms and conditions hereinafter set forth; and WHEREAS, the Executive is willing to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Agreement, the Company and the Executive hereby agree as follows: 1. Employment, Duties and Acceptance. a. Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2 below) as follows: (i) effective on the date hereof, as President and Chief Operating Officer of the Company until Executive becomes Chief Executive Officer in accordance with the following clause (ii); and (ii) effective on the earlier of (x) June 30, 2000 or (y) the resignation or termination of employment of the current Chief Executive Officer of the Company, without further actions or deeds, as the Chief Executive Officer of the Company, in each case subject to the supervision and direction of the Board of Directors of the Company. The Executive shall have such duties, responsibilities and authority as are customarily required of and given to a Chief Executive Officer and such other duties and responsibilities commensurate with such position as the Board of Directors of the Company ("Board") shall determine from time to time. Such duties, responsibilities and authority shall include, without limitation, responsibility for the management, operation, strategic direction, financial structure and overall conduct of the business of the Company. The Executive shall have the right to veto the hiring by the Company of any employees at the level of vice-president or higher. The Executive shall report directly to the Board. b. Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Employer faithfully and to the best of the Executive's ability, to devote all of the Executive's business time, energy and skill to such employment, and to use the Executive's best efforts, skill and ability to promote the Employer's interests. The Executive further agrees to accept election, and to serve during all or any part of the Term, as an officer of the Employer and of any subsidiary or affiliate of the Employer, without any compensation therefor other than that specified in this Agreement, if elected or appointed to any such position by the Board of Directors of the Employer, or of any subsidiary or affiliate, as the case may be. The Company agrees to maintain a Directors and Officer's Liability ("D&O") Policy in the face amount of $5,000,000, covering the Executive for the Term of this Agreement. c. Location. Executive shall be perform his duties primarily at the offices of the Employer in the South Easton/Boston, Massachusetts area, as the Board of Directors may determine, subject to reasonable travel requirements outside of this area on behalf of the Employer. 2. Term of Employment. The term of this Agreement shall commence effective as of May 8, 2000 (the "Commencement Date") and terminate on May 7, 2002 (the "Initial Term"), subject to earlier termination pursuant to the provisions of Section 4 hereof. Notwithstanding the foregoing, upon the termination of the Initial Term, this Agreement shall automatically renew for successive one year periods unless either party gives the other written notice of its election not to renew at least 90 days before the expiration of the Initial Term or any renewal period. The Initial Term and any renewal period is collectively referred to as the "Term." 3. Compensation; Benefits. a. Base Salary. The Company shall pay to the Executive for all services to be performed hereunder and performance of all of his obligations hereunder, including the Executive's compliance with the covenants contained herein, an annual salary of $300,000 ("Base Salary"), payable in accordance with the Company's normal salary payment schedule, as the same may be amended from time to time. Except as specifically provided herein, such salary shall be the Executive's total compensation and is inclusive of compensation received or receivable by the Executive in respect of any other office or employment in, or service to, the Company. The Base Salary may be increased but not decreased at any time by the Board of Directors in their sole discretion. The Board shall review the salary of the Executive and consider an appropriate increase in January 2001, and in each subsequent year during the Term. b. Incentive Compensation. In addition to the Base Salary described in Paragraph 3(a) above, if the Company meets certain targets described below, the Executive shall be entitled to receive, in cash, incentive compensation as described below. (i) Year 2000 Bonus. During the Company's fiscal year ending December 30, 2000 ("Year 2000"), the Executive shall be entitled to incentive compensation payment predicated upon the Company achieving both (i) EBITDA of $6.3 million and (ii) EPS of 53 cents, each in respect of Year 2000. The Executive shall earn incentive compensation payable hereunder in respect of Year 2000 equal to the percentage of his annual Base Salary (which shall not be prorated for purposes of determining incentive compensation) set forth in Exhibit 1, but only so long as the Company achieves EPS of 53 cents or more in respect of Year 2000. (ii) Year 2001 Bonus. During the Company's fiscal year ending December 29, 2001 (the "Year 2001"), Executive's entitlement to incentive compensation for any fiscal year of the Company shall be predicated upon the successful accomplishment of annual, business-related performance goals for the Company established by the Board of Directors of the Company in the Company's annual budget or plan, as approved by the Board of Directors of the Company (each such annual budget or plan being referred to, for the relevant year, as the "Plan"). For such year, the Executive shall earn incentive compensation equal to the percentage of Executive's annual Base Salary set forth in Exhibit 2. The incentive compensation payable hereunder in respect of any period constituting less than an entire fiscal year (a "Partial Year") shall be prorated for the Partial Year and determined in the manner set forth in Section 4(e)(v)(C) hereof. (iii) Certain Adjustments. In the event that the Company shall acquire one or more additional businesses during any year, the parties acknowledge that the Plan must be adjusted, either upward or downward, to set the formula so that the Executive may be compensated for improvements in performance after giving effect to the pertinent transaction. Similar adjustments shall be necessitated by one or more dispositions of businesses by the Company or other corporate events such as stock splits and stock dividends. Therefore, the Plan shall be appropriately adjusted, in light of the facts and circumstances of the particular situation, for acquisitions and dispositions by the Company of businesses or other corporate events that will have an effect on the calculation of EBITDA or EPS of the Company. In the event that the Executive and the Company shall dispute the computation of the calculation of the incentive compensation or appropriate adjustments to the Plan for acquisitions, dispositions or other corporate events, such dispute shall be resolved in the manner described in (iv) below. (iv) The determination of incentive compensation for any year during the Term shall be made by the accountants then auditing the books and records of the Company as soon as may be practicable after the end of such year but no later than ninety (90) days after such year end. Upon the determination of such incentive compensation, the accountants shall deliver a copy of such determination to the Company's Chief Financial Officer and the Executive and, unless either the Company or the Executive notifies the other party that it in good faith objects to such computation within ten (10) business days thereafter, such computation shall be binding and conclusive upon the Company and the Executive. In the event that a party objects to such computation, the Executive and the Company shall endeavor to resolve such dispute, but failing same, and on the request of either the Company or the Executive the dispute shall be submitted for resolution to a national accounting firm as the Company and the Executive may agree upon. The decision of such accounting firm shall be rendered within thirty (30) days and shall be final and binding on the parties. The fees and expenses of such accounting firm shall be borne one-half by the Executive and one-half by the Company. The incentive compensation shall be payable by the Company within thirty days after the determination of the amount thereof has become final and binding on the parties. (v) For purposes of this Agreement: (A) "EBITDA" for any period shall mean the aggregate earnings of the Company, on a consolidated basis, for the relevant period, before interest, taxes, depreciation and amortization, all as determined in accordance with generally accepted accounting principles applied on a basis consistent with the manner in which such principles have heretofore been applied by the independent public accountants of the Corporation, except that: (i) gains and losses on ------ acquisitions and dispositions of capital assets outside the ordinary course of business shall not be taken into account; --- (ii) extraordinary items of income, gain, loss or expense (as so characterized by generally accepted accounting principles applied on a consistent basis) shall not be taken into account; except as may be described below; (iii) any expenses relating to the terminated transaction with Golub Associates, Inc., shall be taken into account; (iv) any expenses relating to salary, incentive compensation, relocation and other transaction expenses payable to the Executive shall be taken into account; and (v) any expenses (severance or otherwise) payable to the Company's current Chief Executive Officer in connection with his departure from the Company, to the extent accrued on the Company's financial statements as of March 31, 2000, shall be taken into account. (B) EPS for any period shall mean the Company's earnings per basic common share, on a consolidated fully-diluted basis, for the relevant period all as determined in accordance with generally accepted accounting principles applied on a basis consistent with the manner in which such principles have heretofore been applied by the independent public accountants of the Corporation, except that: (i) gains and losses on acquisitions and ------ dispositions of capital assets outside the ordinary course of business shall not be taken into account; (ii) --- extraordinary items of income, gain, loss or expense (as so characterized by generally accepted accounting principles applied on a consistent basis) shall not be taken into --- account, except as may be described below; (iii) any expenses relating to the terminated transaction with Golub Associates, Inc., shall be taken into account; (iv) any expenses relating to salary, incentive compensation, relocation and other transaction expenses payable to the Executive shall be taken into account; and (v) any expenses (severance or otherwise) payable to the Company's current Chief Executive Officer in connection with his departure from the Company, to the extent accrued on the Company's financial statements as of March 31, 2000, shall be taken into account. (C) After Year 2001, the Executive and the Company may mutually agree in writing to restructure the terms of Executive's incentive compensation entitlement hereunder. c. Vacation. The Executive shall be entitled to four (4) weeks paid vacation to be taken at such time or times as Executive and Employer may reasonably determine. d. Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, sick leave, group medical insurance or other so- called "fringe" benefit plans which the Employer provides to its employees generally, together with executive benefits for the Executive, as from time to time in effect for officers of the Employer generally, subject in all respects to the terms, conditions and qualifications of such plans. During the Term, a Company-owned computer will be installed in Executive's home and the Company shall pay for monthly Internet access with respect to such computer. e. Options. The Company shall grant to the Executive options to purchase 250,000 shares of common stock of the Company, at a price which shall equal the Fair Market Value (as defined in the Company's 2000 Stock Incentive Plan) of the shares on the Commencement Date. Such options shall be subject to the terms of the Company's 2000 Plan approved on April 11, 2000 by the Board of Directors and the standard form of stock option agreement to be used for employees under the 2000 Plan. The Executive shall be eligible for additional option grants under the Company's 2000 Stock Incentive Plan (or any successor plans) commensurate with his title and position with the Company. In addition, the Company has recommended to the Company's Option Committee (the "Option Committee") and the Option Committee has agreed that the Executive shall receive a grant of options to purchase 250,000 shares of common stock of the Company, at a price which shall equal the Fair Market Value (as defined in the applicable stock option plan) of the shares on the date of grant, at the first meeting of the Option Committee after the end of the first fiscal year of the Company in which the Company's gross revenues exceed $120,000,000. All options granted to the Executive shall, to the maximum extent permitted by law, be classified as incentive stock options. Such options shall vest in three equal installments as follows: on the first anniversary of the date of grant, on the second anniversary of the date of grant, and on the third anniversary of the date of grant. In the event that the Executive's employment is terminated by the Company without cause or by the Executive for Good Reason, any options that have not vested as of the date of such termination shall become immediately exercisable by the Executive on the termination date, and shall be exercisable for a period of five years after the termination date (or, if earlier, through the expiration date of such options). In the event of a corporate transaction described in Section 18.1 of the 2000 Stock Incentive Plan, any options that have not vested shall become fully vested prior to the consummation of such transaction. In the event that the Executive's employment is terminated by reason of the Executive's death or disability (as such term is defined in Section 4(a) hereof), any options, upon vesting in accordance herewith, shall each be exercisable until the earlier of (i) 6:00 p.m., Boston time, on the fifth anniversary of the date of death or disability, (ii) the expiration date of such option or (iii) the occurrence of any other event under the terms of the relevant plan or option agreement that would accelerate the termination date of such option. In the event that the Executive's employment is terminated for "cause," any options shall be exercisable until the earlier of (i) 6:00 p.m., Boston time, on the thirtieth (30th ) day following the termination date and (ii) the expiration date of such option. f. Relocation Expenses. (i) The Company shall reimburse the Executive for certain expenses which he actually and necessarily incurs in connection with relocating his personal residence from New York to the Boston area up, to a maximum of $150,000, as follows: (A) for all direct moving expenses (as such terms are defined in Section 217 of the Internal Revenue Code) and for reasonable brokerage commissions, if any, incurred in connection with the sale of Executive's home in New York; and (B) for any State or Federal Income Tax incurred on the sale of the Executive's residence in New York (which taxes shall be equal to the Executive's taxable gain realized on such sale multiplied by the highest tax rate in effect under the Internal Revenue Code or applicable State tax law with respect to such income); and (C) for temporary lodging and other miscellaneous expenses incurred prior to occupancy of his new residence but only until September 1, 2000. (ii) Such relocation expenses shall be reimbursed in accordance with the Company's reimbursement policies and guidelines. (iii) If the Executive is terminated for cause, or if the Executive voluntarily terminates the Agreement without Good Reason prior to expiration of the Initial Term, he shall repay the amounts paid to him or on his behalf by the Company under subparagraph (i) above as follows: (A) if such termination occurs prior to the first anniversary of the Commencement Date, 50% of reimbursed relocation expenses; (B) if such termination occurs on or after the first anniversary of the Commencement Date and prior to the eighteenth (18th) month after the Commencement Date, 25% of the reimbursed relocation expenses; g. Reimbursement of Business Expenses. During the Term of this Agreement, upon submission of proper invoices, receipts or other supporting documentation satisfactory to the Company, the Executive shall be reimbursed by the Company for all reasonable business expenses actually and necessarily incurred by the Executive on behalf of the Company in connection with the performance of services under this Agreement. h. Life Insurance. The Company shall obtain and maintain in full force and effect at all times during the Term a term life insurance policy on the life of Executive, which will provide a death benefit to Executive's designee (or, if none, Executive's estate) of Five Hundred Thousand Dollars ($500,000.00). i. Legal Fees. The Company shall pay all reasonable attorneys' fees incurred by the Executive in connection with the negotiation, preparation and execution of this Agreement, not to exceed $5,000. j. House Loan. The Company shall lend to Executive up to $150,000 for use by Executive in connection with the purchase of a house in the South Easton/Boston, Massachusetts area. Such loan, which shall be evidenced by Executive's promissory note, shall bear interest at the rate paid by the Company for borrowed money from its commercial lenders from time to time, which interest shall be payable quarterly. The principal amount, together with accrued and unpaid interest thereon, shall be payable on the earlier of the third anniversary date of the loan or the date which is thirty days after the date of termination of Executive's employment for any reason. 4. Termination. This Agreement shall terminate prior to the termination date set forth in Section 2 hereof upon the following terms and conditions: a. Death or Permanent Disability. If the Executive dies or becomes permanently disabled, this Agreement shall terminate effective at the end of the calendar month during which his death occurs or when his disability is deemed to have become permanent. If the Executive is unable to substantially perform all of his normal duties for the Company in the usual and customary fashion because of illness or incapacity (whether physical or mental) for 90 or more days (whether or not consecutive) out of any Three Hundred Sixty Five (365) consecutive days, his disability shall be deemed to have become permanent. b. Cause. If the Board of Directors of the Company vote to terminate the Executive's employment for cause, this Agreement shall terminate and the Executive shall be removed from office effective on the date specified by such directors. For purposes of this Agreement, termination of the Executive's employment shall be deemed for cause if such termination is the result of: (i) the Executive's misappropriation of the Company's funds or property, or fraud on the part of the Executive; (ii) the Executive's conviction of, or plea of guilty or no contest to, any felony under the laws of the United States or any State or political subdivision thereof; (iii) a knowing misrepresentation of a material fact made by the Executive to the Company's Board of Directors; (iv) a material breach of this Agreement by the Executive, provided that the Executive has first been given written notice describing such breach in reasonable detail, and within fifteen (15) days he has not remedied the same; (v) Executive uses illegal drugs or chronically abuses legal drugs or alcohol during business hours or conducts business under the undue influence of drugs or alcohol or his abuse of drugs or alcohol adversely affects his ability to perform his duties, which Executive shall not have cured after reasonable notice and a reasonable opportunity to cure; (vi) engaging in an act of sexual harassment or discrimination prohibited by the laws of the United States or a state in which the Company's offices are located or in which the Company conducts business which undermines or is detrimental to the Company, or any other conduct taken or omitted in bad faith which is significantly detrimental to the Company; or (vii) any other action or omission constituting gross negligence or willful misconduct by the Executive, in the performance of his duties hereunder. c. Good Reason Termination. The Executive may terminate his employment for "Good Reason" at any time during the Term by written notice to the Company given not more than fifteen (15) days after the occurrence of the event constituting "Good Reason." Such notice shall state an effective date no earlier than fifteen (15) days after the date it is given. The Company shall have fifteen days (15) from the receipt of such notice within which to cure or dispute in good faith the reasons set forth in such notice. If not timely cured or disputed in good faith, termination by Executive of his employment for "Good Reason" shall be treated as termination by the Company without cause. For purposes hereof, "Good Reason" shall mean: (i) the assignment to Executive of any duties inconsistent with Executive's position (including status), authority or material responsibilities, or the removal of Executive's authority or material responsibilities; (ii) the failure by the Company to make any payment when due hereunder or to comply with any of the other material provisions of this Agreement; (iii) the sale of substantially all of the Company's assets or a "change of control" (as defined in the Company's 1996 Stock Incentive Plan, as amended) of the Company shall have occurred; and (iv) failure by the Company to obtain approval of the 2000 Stock Incentive Plan by its shareholders. d. Termination Without Cause. The Company may terminate the Executive's employment under this Agreement without "cause" (as defined above) at any time during the Term by ten (10) days' advance written notice to the Executive. e. Termination Payments, Etc. In the event that the Executive's employment terminates under the circumstances described herein, the Executive shall be entitled to receive, subject to applicable withholding taxes, the following amounts: (i) Upon a termination of employment due to the Executive's death pursuant to Section 4(a) hereof, the Executive's estate shall be entitled to such benefits as are provided pursuant to Section 3(d) hereof for a period of one year from the date of death or the period remaining in the Term, whichever ends sooner. (ii) Upon a termination of employment due to the Executive's permanent disability pursuant to Section 4(a) hereof, the Executive shall (A) receive the Base Salary for a period of one year from the date such permanent disability is determined pursuant to Section 4(a) hereof or the period remaining in the Term, whichever ends sooner, payable in accordance with Section 3(a) hereof (less any amounts of disability income paid to the Executive pursuant to any disability insurance policy maintained by the Company); and (B) be entitled to such other benefits as are provided pursuant to Sections 3(d) and (h) hereof for a period of one year from the date such permanent disability is determined pursuant to Section 4(a) hereof or the period remaining in the Term, whichever ends sooner. (iii) In addition to the amounts set forth in (i) and (ii) above, if the Executive's employment is terminated by reason of the Executive's death or disability during the term, Executive shall be entitled to payment of the sum of (i) any Base Salary through the date of termination, as well as any earned bonus for any calendar year or pro-rated portion of such year through the date of termination, that theretofore had not been paid and (ii) any other compensation earned through the date of termination but not yet paid or delivered to the Executive ("Accrued Obligations"), which shall be paid or made to the Executive or his estate or beneficiary, as applicable. (iv) Upon a termination of employment by the Company for "cause" pursuant to Section 4(b) hereof, the Executive shall receive only the Base Salary through the date of such termination, payable in accordance with Section 3(a) hereof. (v) Upon a termination of employment during the Term by the Company without cause or by the Executive for Good Reason, the Term shall terminate on the date of such termination and the Company's remaining obligations to the Executive shall be as follows: (A) Accrued Obligations; (B) payment to the Executive within thirty (30) days of the date of termination of a lump sum equal to the Executive's Base Salary for the remainder of the Term; and (C) any earned bonus for the pro-rated portion of the calendar year in which Executive's employment is terminated through the date of termination, to the extent and in the manner accrued on the Company's financial statements. (vi) Upon a voluntary termination of employment by the Executive for any reason other than Good Reason, the Executive shall only receive the Base Salary through the date of such termination, payable in accordance with Section 3(a) hereof. f. No Mitigation; Offset. In the event of any termination of employment under Sections 4(c) or 4(d) hereof, the Executive shall be under no obligation to seek other employment. g. Nature of Payments. Any amounts due under this Section 4 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. 5. Protection of Confidential Information; Non-Competition. a. Confidentiality. In view of the fact that the Executive's work for the Employer will bring the Executive into close contact with confidential affairs, information and plans for future developments of the Employer not readily available to the public, as well as access to certain trade secrets pertaining to the business of the Employer, all of which Executive acknowledges are proprietary to and the exclusive property of the Company, the Executive agrees: (i) To keep and retain in the strictest confidence all confidential matters of the Employer, including, without limitation, "know how", trade secrets, unpatented inventions, technology, software, clinical trials, test results, policies, operational methods, technical processes, formulae, inventions, research projects, evaluations, reports, business plans, financial information, customer lists, suppliers and other business affairs of the Employer, learned by the Executive including, but not limited to all information relating to functional imaging as a medical industrial commercial or commercial diagnostic or investigational tool and any confidential information concerning any of the financial arrangements, financial positions, competitive status, customer or suppliers matters, internal organizational matters, technical capabilities, or other business affairs of or relating to the Company (collectively, "Confidential Information") known to or learned by the Executive hereafter and, except to the minimum extent required by law or legal process, and not to disclose or use such Confidential Information to or for the benefit of anyone other than Executive's, consultants and representatives of the Company on a "need to know" basis, either during or after termination of the Executive's employment with the Company, for any reason, except in the course of performing the Executive's duties hereunder or with the Company's express written consent; and (ii) To deliver promptly to the Company on termination of the Executive's employment, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents, and all copies thereof, including computer programs, discs, software, firmware, etc., relating to the Company's business, operations and financial condition, and all property associated therewith, which the Executive may then possess or have under the Executive's control. b. Covenants Not to Compete. (i) Executive covenants to and with Company that during employment by Company and for one year following the termination of employment, for any reason, Executive will not, directly or indirectly, either as a principal, agent, employee, employer, stockholder, or co-partner, or in any other individual or representative capacity: (A) engage in or carry on any business which is in competition with the business now or hereinafter conducted by the Company during the Term ("Business") in the Territory (as hereinafter defined), provided, however, that such covenant not to compete shall not apply solely in the event that the Company defaults in making any payment required to be paid to Executive hereunder which amount is not paid or disputed in good faith by the Company within fifteen (15) days after notice of non-payment is given by the Executive. Nothing contained in this Section 5, whether express or implied, shall prevent the Executive from being a holder of two percent (2%) or less for the purposes of passive investment only of marketable securities then being quoted on a recognized national stock exchange or traded on the National Market System of the NASDAQ. Notwithstanding anything to the contrary contained in this Section 5, nothing contained in this Section 5 is intended, nor shall be deemed, to restrict the Executive from using his free time to continue or otherwise engage in charitable and other not for profit professional activities. "Territory" shall mean the United States of America, the United Kingdom, or any place else worldwide in which any aspect of the Business is then conducted; (B) solicit any past, present, or other customers during the Term, of the Company or its affiliates ("Customers") for business in any way relating to any aspect of the Business; (C) request, directly or indirectly, that any Customers or other persons sharing a business relationship with the Company or any of its affiliates, curtail or cancel their business with the Company or any of its affiliates, or otherwise take action which might be to the disadvantage of the Company or any of its affiliates; or (D) induce or actively attempt to influence any other employee or consultant of the Company or any of its affiliates to terminate such other employee's or consultant's employment or consultancy with the Company or any of its affiliates. (ii) If the Executive violates any of the restrictions contained in Section 5(a) hereof, the restrictive period provided for in such Section shall be increased by the period of time from the commencement of any such violation until the time such violation shall be cured by the Executive to the satisfaction of the Company. (iii) The Executive acknowledges that the foregoing restrictions are reasonable under the circumstances of his employment and the Business and will not prevent him from earning a living. c. Remedies. If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5(a) or 5(b) hereof, the Employer shall have the following rights and remedies: (i) Executive understands and agrees that Company shall suffer irreparable harm in the event that Executive breaches any of Executive's obligations under Sections 5(a) and 5(b) of this Agreement and that monetary damages shall be inadequate to compensate Company for such breach. Accordingly, Executive agrees that, in the event of a breach or threatened breach by Executive of any of the provisions of this Agreement, the Company shall be entitled to a temporary restraining order, preliminary injunction and permanent injunction in order to prevent or restrain any such breach by Executive. (ii) The Company shall be entitled to seek all other monetary damages to which it is entitled under the law in connection with any transactions constituting a breach of any of the provisions of Sections 5(a) or 5(b). Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Employer under law or in equity. (iii) If any of the covenants contained in Sections 5(a) or 5(b), or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions, to the maximum extent possible to carry out the intent of the parties. (iv) If any of the covenants contained in Sections 5(a) or 5(b), or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and, in its reduced form, said provision shall then be enforceable. (v) In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in Sections 5(a) and 5(b) or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Employer, all expenses (including reasonable attorneys' fees) of the Employer in such action, suit or other proceeding shall (on demand of the Employer) be paid by the Executive. In the event the Employer fails to obtain a judgment for money damages or an injunction in favor of the Employer, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Employer. d. Representation of Executive. The Executive represents and warrants that he is not party to, or bound by, any agreement or commitment, or subject to any restriction, including, but not limited to agreements related to previous employment containing confidentiality or non-compete covenants, which in the future may have a possibility of adversely affecting the business of the Company or the performance by the Executive of his duties under this Agreement. 6. Inventions and Patents. a. Covered Inventions. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, of any type nature, description or purpose, the extent that same relate to the Business, whether patentable or not, conceived, developed, invented or made or improved by him prior to or during the Term, (collectively, "Covered Inventions"), whether during or outside normal business hours, whether or not on the Company's premises, whether or not requested or financed by the Company, shall immediately be communicated by the Executive to the Company and shall belong to the Company. The Executive shall further (a) promptly disclose such Covered Inventions to the Company; (b) assign to the Company, without additional compensation, all patent and other rights to such Covered Inventions for the United States and foreign countries; and (c) sign all papers necessary to carry out the foregoing. If any Covered Invention is described in a patent application or is disclosed to third parties, directly or indirectly, by the Executive within one (1) year after the termination of the Executive's engagement, it is to be presumed that the Invention was conceived or made during the Term. b. Execution of Documents. The Executive shall at any time, whether during or after the term of this Agreement, at the request of the Company, execute all documents and do all acts and things as the Company may reasonably request in connection with the obtaining of Patents in the United States of America or elsewhere for Covered Inventions on behalf of the Company. 7. Intellectual Property. The Company shall be the sole owner of all the products and proceeds of the Executive's services hereunder, including, but not limited to, all inventions materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create during the Term related to the Business, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever. The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such properties. 8. Indemnification. The Company hereby undertakes and agrees to indemnify and hold Executive harmless, to the fullest extent permitted under applicable law, from, against and in respect of any and all loss, liability, cost, expense or damage (and any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including, without limitation, legal fees and expenses, incident to any of the foregoing) suffered or incurred by Executive arising out of in connection with(a) his performance of his duties with or for the Company, (b) his holding any office, title or capacity with the Company at any time, or (c) by reason of any act or omission of the Company; provided that Executive did not act in bad faith or in a manner he reasonably believed to be opposed to the best interests of the Company. 9. General. a. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by facsimile transmission with confirmation, overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Employer, to: If to the Employee, to: Specialty Catalog Corp. Joseph Grabowski 21 Bristol Drive c/o Specialty Catalog Corp. South Easton, MA 02375 21 Bristol Drive Att'n: Thomas McCain, CFO South Easton, MA 02375 Fax: 508-238-5694 Fax: 508-238-5694 With a copy to: With a copy to: Kane Kessler, P.C. 1350 Avenue of the Americas James J. Coster, Esq. New York, New York 10019 Satterlee Stephens Burke & Burke LLP Att'n: Jeffrey S. Tullman, Esq. 230 Park Avenue Fax: 212-245-3009 New York, New York 10169 Tel: 212 818-9200 Fax: 212 818-9606 b. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to agreements made and to be performed entirely in Delaware. c. Headings. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. d. Entire Agreement. This Agreement may be executed by facsimile signatures in one or more counterparts, each of which shall be deemed an original. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. e. Assignment. This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate or (ii) to third parties in connection with any sale, transfer or other disposition of its business or assets, except as would result in a change in control of the Company; and the obligations of the parties hereunder shall be binding on their successors, heirs or assigns. f. Amendment. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. g. Survival. The provisions of Paragraphs 5, 6, 7 and 8 shall survive the expiration or termination of this Agreement for any reason, and shall remain in full force and effect. In Witness Whereof, the parties have executed this Employment Agreement as of the date first above written. Specialty Catalog Corp. By: /s/ Martin E. Franklin ----------------------- Name: Martin E. Franklin Title: Director The Executive: /s/ Joseph Grabowski -------------------- Joseph Grabowski EXHIBIT 1 --------- Year 2000 Incentive Compensation For Year 2000 incentive compensation shall be determined as follows:
Percentage Of Annual Base Salary To Be Year 2000 EBITDA Awarded As Incentive Compensation - ---------------- --------------------------------- $6.3 million to $6.7 million 25.0% (Resulting in a bonus of $75,000) $6.8 million 30.0% (Resulting in a bonus of $90,000) $6.9 million 35.0% (Resulting in a bonus of $105,000) $7.0 million 40.0% (Resulting in a bonus of $120,000) $7.1 million 45.0% (Resulting in a bonus of $135,000) $7.2 million or greater 50.0% (Resulting in a bonus of $150,000) $7.2 million to $8.0 million 75.0% (Resulting in a bonus of $225,000) $8.0 million or over 100.0% (Resulting in a bonus of $300,000)
In the event that the Company's EBITDA is greater than $6.7 million but falls between any of the amounts set forth in the left column, then the percentage of annual Base Salary to be awarded as an incentive compensation shall be prorated between the immediately lower and immediately higher entries in the right column. For example, if EBITDA is exactly $6.85 million, or halfway between $6.8 million and $6.9 million in the left column, then the incentive compensation would be exactly halfway between the corresponding percentages in the right column, or 32.5% of annual Base Salary. EXHIBIT 2 --------- Year 2001 Incentive Compensation For periods commencing Year 2001 Corporation's Actual EBITDA Percentage Of Base Salary To Be As A Percentage of Plan EBITDA Awarded As Incentive Compensation - ------------------------------ --------------------------------- 90% 10.0% 100% 25.0% 110% 50.0% 120% 75.0% 130% and above 100.0% In the event that the Company's actual EBITDA as a percentage of Plan EBITDA is greater than 90% but falls between any of the percentages set forth in the left column, then the percentage of Base Salary to be awarded as incentive compensation shall be prorated between the immediately lower and immediately higher entries in the right column. For example, if actual EBITDA is exactly 95% of Plan EBITDA, or halfway between 90% and 100% in the left column, then the incentive compensation would be exactly halfway between the corresponding percentages in the right column, or 17.5% of Base Salary. EX-10.2 3 EIGHTH AMENDMENT TO CREDIT & GUARANTY Exhibit 10.2 ================================================================================ EIGHTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT AND SEVENTH AMENDMENT TO CREDIT AGREEMENT Dated as of May 12, 2000 Among SPECIALTY CATALOG CORP. SC CORPORATION, d/b/a SC DIRECT SC PUBLISHING, INC. DAXBOURNE INTERNATIONAL LIMITED and FLEET NATIONAL BANK ================================================================================ EIGHTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT AND SEVENTH AMENDMENT TO CREDIT AGREEMENT This EIGHTH AMENDMENT TO CREDIT AND GUARANTY AGREEMENT and SEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of May 12, 2000 by and among SPECIALTY CATALOG CORP., a Delaware corporation (the "Company" or the "Parent"), SC CORPORATION, a Delaware corporation d/b/a SC DIRECT ("SC Direct"), and SC PUBLISHING, INC., a Delaware corporation ("SC Publishing") (each a "U.S. Borrower," and collectively, the "U.S. Borrowers"), DAXBOURNE INTERNATIONAL LIMITED, (Registered No. 3369640), a private company limited by shares formed under the laws of England and Wales (the "U.K. Borrower") (the U.S. Borrowers and U.K. Borrower, each a "Borrower," and collectively, the "Borrowers") and FLEET NATIONAL BANK (f/k/a BankBoston, N.A.), a national banking association (the "Bank"). Recitals -------- The Borrowers and the Bank are parties to a Credit and Guaranty Agreement dated as of March 12, 1997 (as amended, the "U.S. Credit Agreement") and a Credit Agreement dated as of October 3, 1997 (as amended, the "U.K. Credit Agreement") (each a "Credit Agreement," and collectively, the "Credit Agreements"). All capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreements. The Borrowers desire to amend the Credit Agreements in certain respects, and the Bank is willing to agree to such amendments on the terms and conditions set forth herein. NOW, THEREFORE, subject to the satisfaction of the conditions to effectiveness specified in Section 5, the Borrowers and the Bank hereby amend the Credit Agreements as follows: Section 1. Amendment of Definitions. Section 1.1 of each of the ------------------------ Credit Agreements is hereby amended as follows: (a) The definition of "Consolidated EBITDA" is hereby ------------------- deleted in its entirety and a new definition substituted therefor as follows: "`Consolidated EBITDA' shall mean for any ------------------- period the sum of (a) Consolidated Net Income plus (b) all amounts deducted in computing Consolidated Net Income in respect of (i) interest expense on Indebtedness, (ii) taxes based on or measured by income, and (iii) depreciation and amortization expense, in each case for the period under review; provided, however, that in calculating Consolidated -------- ------- Net Income, (i) the restructuring charge incurred by the Company and its Subsidiaries relating to severance packages for certain senior employees during the quarter ended October 2, 1999, in an aggregate amount not to exceed $600,000, shall not be treated as an expense during such quarter but shall be treated as an expense in future quarters as and when such severance amounts are paid in cash or property, (ii) the charge incurred by the Company associated with the termination of the "Paula's Hatbox" line of business during the quarter ended January 1, 2000 up to $1,800,000, shall not be treated as an expense, (iii) the non-operating charge incurred by the Company and its Subsidiaries associated with a proposed transaction with Golub Associates during the quarter ended March 31, 2000 up to $467,000, shall not be treated as an expense and (iv) the charge incurred by the Company and its Subsidiaries related to severance payments made to the chief executive officer of the Company during the quarter ended March 31, 2000 up to $397,000, shall not be treated as an expense; and provided, -------- further, that in calculating Consolidated EBITDA ------- for any period through the third quarter of 2000 for the purposes of Sections 7.1 and 7.3 hereto, there shall be included an assumed $125,000 of net income from operations of American Healthcare Institute, Inc. ("AHI") for each quarter of operations of AHI through the third quarter of 1999 of the Borrowers." (b) A new definition of "Eighth Amendment" shall be added in alphabetical order, as follows: "`Eighth Amendment' shall mean the Eighth Amendment to Credit and Guaranty Agreement and Seventh Amendment to Credit Agreement dated as of May 12, 2000 by and among the Borrowers and the Bank." Section 2. Amendment of Financial Covenants. Article 7 of each of -------------------------------- the Credit Agreements is hereby amended by deleting Section 7.2 in its entirety and substituting therefor the following: "Section 7.2. Ratio of Consolidated Operating Cash ------------------------------------ Flow to Consolidated Total Debt Service. The Company and its --------------------------------------- Subsidiaries shall not permit for any period of four consecutive fiscal quarters, commencing with the period ending March 31, 2000, the ratio of (a) Consolidated Operating Cash Flow to (b) Consolidated Total Debt Service, to be less than 1.25-to-1.0; provided, however, that for -------- ------- purposes of calculating Consolidated Total Debt Service, the Company shall be presumed to have made the required $500,000 principal payments on the Term Loan on January 4, 1999, July 1, 1999 and October 4, 1999, notwithstanding that such payments may actually have been made prior to such dates or deemed to have been made prior to such dates." Section 3. Amendment of Events of Default. Section 10.1 of each of ------------------------------ the Credit Agreements is hereby amended by deleting paragraph (h) in its entirety and substituting therefor the following: "(h) The chief executive officer of the Company, SC Direct and SC Publishing shall cease to serve actively as a full-time employee of such entities, whether by reason of death, disability, resignation, action by the Board of Directors, or otherwise, and 90 days shall have passed without express written waiver." Section 4. Waiver of Default. The Bank hereby waives the Default that ----------------- has occurred pursuant to Section 10.1(h) of the Credit Agreements (prior to amendment hereby) as a result of the cessation by Steven L. Bock of active full-time employment with the U.S. Borrowers. The Bank's waiver hereunder of such Default shall not establish a course of dealing or constitute or otherwise be an implicit waiver of subsequent Defaults. Section 5. Effectiveness; Conditions to Effectiveness. This Eighth ------------------------------------------ Amendment to Credit and Guaranty Agreement and Seventh Amendment to Credit Agreement shall become effective as of the date set forth above upon execution hereof by the Borrowers and the Bank and satisfaction of the following conditions: (a) Fee. The Borrowers shall have paid to the Bank a fee of --- $15,000, which fee shall be earned in full by the Bank upon its execution hereof. Section 6. Representations and Warranties; No Default. The U.S. ------------------------------------------ Borrowers hereby confirm to the Bank the representations and warranties of the U.S. Borrowers set forth in Article 5 of the U.S. Credit Agreement as amended as of the date hereof, as if set forth herein in full (provided, however, that -------- ------- references therein to the 1996 Financial Statements shall be deemed to refer to the audited financial statements of Specialty Catalog Corp. and its Subsidiaries for fiscal year 1999; and provided, further, that the representation contained -------- ------- in Section 5.12 of the U.S. Credit Agreement is qualified to the extent of the resignation of Steven L. Bock as a full-time employee of the Borrowers). The U.K. Borrower hereby confirms to the Bank the representations and warranties of the U.K. Borrower set forth in Article 5 of the U.K. Credit Agreement as amended as of the date hereof, as if set forth herein in full (provided, however, that references therein to the 1996 Financial Statements shall be deemed to refer to the audited financial statements of Specialty Catalog Corp. and its Subsidiaries for fiscal year 1999; and provided, further, that the representation contained -------- ------- in Section 5.12 of the U.K. Credit Agreement is qualified to the extent of the resignation of Steven L. Bock as a full-time employee of the Borrowers). The Borrowers hereby certify that (except as set forth and waived by the Bank pursuant to Section 4 hereof) no Default exists under the Credit Agreements. Section 7. Miscellaneous. The Borrowers agree to pay on demand all the ------------- Bank's reasonable expenses in preparing, executing and delivering this Amendment, and all related instruments and documents, including, without limitation, the reasonable fees and out-of-pocket expenses of the Bank's special counsel, Goodwin, Procter & Hoar LLP. This Amendment shall be a Bank Agreement under each of the Credit Agreements and shall be governed by and construed and enforced under the laws of The Commonwealth of Massachusetts (except to the extent it effects any amendment of the U.K. Credit Agreement, as to which English law shall apply). [Remainder of Page Intentionally Left Blank] IN WITNESS WHEREOF, the U.S. Borrowers, the U.K. Borrower and the Bank have caused this Eighth Amendment to Credit and Guaranty Agreement and Seventh Amendment to Credit Agreement to be executed by their duly authorized officers as of the date first set forth above. SPECIALTY CATALOG CORP. By: /s/ Thomas McCain ---------------------------------- Name: Thomas McCain Title: Senior Vice President SC CORPORATION d/b/a SC DIRECT By: /s/ Thomas McCain ---------------------------------- Name: Thomas McCain Title: Senior Vice President SC PUBLISHING, INC. By: /s/ Thomas McCain ---------------------------------- Name: Thomas McCain Title: Senior Vice President DAXBOURNE INTERNATIONAL LIMITED By: /s/ Thomas McCain ---------------------------------- Name: Thomas McCain Title: Senior Vice President FLEET NATIONAL BANK By: /s/ John Sharry ---------------------------------- Name: John Sharry Title: Vice President ACKNOWLEDGMENT OF GUARANTOR The undersigned, Guarantor of all Bank Obligations pursuant to an Unlimited Guaranty dated as of December 30, 1997, hereby acknowledges and consents to the foregoing. SC LICENSING CORP. By: /s/ Bradford Bishop ---------------------------------- Name: Bradford Bishop Title: President EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 3-MOS DEC-30-2000 JAN-01-2000 JAN-02-2000 JAN-03-1999 APR-01-2000 APR-03-1999 202,181 911,969 0 0 1,644,996 1,262,769 (99,415) (57,845) 5,178,285 5,156,821 11,741,752 10,894,334 8,719,548 7,351,779 (4,261,004) (4,102,254) 25,265,074 22,203,738 15,073,338 10,775,867 0 0 0 0 0 0 52,397 52,397 7,651,572 7,623,867 25,265,074 22,203,738 13,963,300 13,266,668 13,963,300 13,266,668 4,867,849 4,560,428 4,867,849 4,560,428 8,948,060 7,666,090 0 0 214,580 195,813 (67,189) 844,337 (27,560) 347,169 (39,629) 497,168 0 0 0 0 0 0 (39,629) 497,168 (0.01) 0.11 (0.01) 0.11
-----END PRIVACY-ENHANCED MESSAGE-----